With a new sheriff in town, the ECB is surprisingly cutting interest rates to 1.25% from 1.5%. While their sole mandate is inflation and the euro zone CPI is running 3%, Draghi is obviously betting on a fall in that inflation rate on the Phillips curve belief that lower growth will eventually lead to lower inflation. The 1970′s turned that theory on its head but some still have faith, including the Federal Reserve. In terms of impact, the move is more symbolic than anything as moving rates from 1.5% to 1.25% isn’t going to move the needle for a region that is suffering from structural economic stagnation and too much debt. Psychologically though, markets love it just as it loves every easing move by the Fed. Cheap money! Party on!

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

Just as an aside for Mr. Boockvar, I agree that it is not low economic growth that reduces inflation. Contraction in the supply of credit does…and that is what are we seeing in Europe right now. This rate cut is an attempt to fight it but it’s probably too late. A severe credit crunch, if it happens, will make everyone quickly forget inflation as a problem.

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About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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